Missing the ETF growth party

The Canadian ETF market is set to double its assets under management within the next year or so, according to industry experts. Cost is driving that expansion, obviously. But so are innovations such as actively managed ETFs and the quest for alternative beta—different ways to tap market premiums without resorting to the usual market-cap weighting, notes Pat Chiefalo, director of derivatives and structured products at National Bank Financial. He was speaking at a recent conference sponsored by the Canadian ETF Association and the Toronto Stock Exchange.

What’s interesting in this growth—and it’s significant growth compared to mutual fund sales—is who is buying. It’s mostly retail investors. There are some firms that are dedicated to pure ETFs. That is, they don’t want actively managed ETFs, nor alternative beta. They want the historical beta, so that they can match reward/risk/probabilities to current business cycles.

These are small firms—not the Fidelitys, or Invescos or the CI Investments of the world. Niche managers, one might call them, like Cougar Global Investments or HAHN Investment Stewards. Both rely on macroeconomic judgments to find the beta that fits the existing risk regime. And manage through it.

Time will tell whether the fund manager has gotten the ETF-macro equation right. But what’s interesting is who is not in the ETF market. Pensions, endowments and foundations often resort to passive management for what is typically a portfolio split 60/40 between equities and bonds.

They often use external managers for what is ultimately a passive portfolio. Thus, an active manager for an indexed portfolio. But they’re not buying ETFs. Maybe 10% of the ETF market is represented by institutional investors, it was reported at the conference.

That could change. But not soon. Institutional investors observe a somewhat glacial manager replacement process. To their loss, perhaps.